Excerpts from CNBC-TV18's exclusive interview with Abhijit Chakraborty: 

Q: The inflation number marginally lower is helping sentiment but do you think it is premature to celebrate? 

A: We have been maintaining this stance for quite some time and we expected the crude prices to correct; commodities as a basket overall to correct and that is beginning to reflect now in inflation also.  

In case of inflation, the worst is not yet over and we should not be jumping too much - we are in a declining trend as of now. Clearly two things have happened, one is the fact that the soft products, the vegetable prices have come off and the other thing is that because the crude prices have come off, the non-administrative prices in ATF, Bitumen and naphtha have helped in bringing the inflation down. But the base effect of last year will continue to have an adverse impact on inflation for the coming three-four weeks. So there is still a possibility of inflation to cross 13% and I see inflation topping out close to 13-13.5%. So it might be premature to assume that there is a turnaround but definitely it gives a relief that after six and a half months or so we are seeing a turnaround in inflation.  

Q: We are already up 2.5% this morning - how much more would you give this rally then?

A: A couple of factors have come together apart from the fact that inflation in India has come as a positive surprise. Even the US data is very positive and should also help in maintaining the momentum for some more days. Also the overall valuation in the market is attractive and there are serious pockets of valuation available in the largecap and midcap space. In the absence of any significant negative triggers and if crude does not go up further from here, we could see at least 6-7% uptick on the Index - both Sensex and Nifty. 

Q: We have seen a meaningful bounce in the banks, in the real estate stocks this morning. Would you expect much more meaningful rallies from here in these?               

A: We are very positive on the financial space. Above 9% is going to be a severe hit on the bond portfolio of the banks - there is a slowdown in the credit, Reserve Bank of India (RBI) is very hawkish; all those things are known. But what needs to be kept in mind that perhaps we are nearing the phase where inflation will plateau out around 13-13.5% and there could be at worst one more round of rate hike coming from RBI on the cash reserve ration (CRR) hike. 

So we are nearing the end of the negative sentiment build-up in the financial space. On the other hand, one is seeing valuations that are extremely attractive. In case of PSU banks, if one sees the subsidiary valuations and insurance plays, the core banking businesses are available at one time and less than one time. One is building in a fact that there is going to be no growth in book, which is not true. So even in this scenario, we are going to see a growth in the book; there is a great value offering. As we have seen today, whenever there is a feeling that interest rates have plateaued out or peaked out, this is one sector that is going to be a serious outperformer.  

Q: What to your mind is the extent of the upside to this market? Do you think we will get back to those 15,000 kind of levels where we were a few weeks back and if we do, does the market have enough going for it to climb beyond that or is that the top-end of the range according to you? 

A: Everything hangs in a balance as of now. We could perhaps be touching 15,000 levels very soon in this month or so. My fear is on two counts, whatever we have seen in terms of government measure, tightening of monetary policy and fiscal measures, what kind of impact does that going to have on Q2 and Q3 numbers. We are okay on Q1 numbers as per market expectations but if Q2 and Q3 are going to be slower than Q1; that is something to watch out for before taking a final leap in the market. The other concern is the fiscal deficit - that is something that can spoil the macro economic factor going forward. Barring these two, right now there is no further negative that one can expect in the market for one and a half month or so because the monetary policy is towards end of October. So the market could see every sharp upside to about 15,000 and then perhaps again wait for cues from these two factors.  

Q: So for the next two-three months, one would say that 13,000 to 15,000 kind of range is likely or do you see major movements on either side of these two signposts? 

A: Purely on the valuation front, it is a market to keep on buying and as far as a range is concerned, 13,000-15,500 seems to be the range. The market will come to about 13,000 only if crude crosses USD 125 per barrel. Otherwise it should be somewhere between 14,000 and 15,500 kind of a range. But if one sees little long-term, this is a market to buy. The investor apathy that we are seeing right now in spite of the fact that there are a lot of stocks in largecap space that are extremely attractively valued right now. We are not seeing any significant inflows from the FIIs. Till the time the global equity market and the equity risk appetite improves, if the sentiment does not improve, then this general apathy in the market can keep the market attractive and undervalued for a sufficiently long period of time. 

Disclosures: 

It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.